IHT ‘The unfair’ tax captures more in its net

At the same time as a poll for the Sunday Telegraph suggested voters believe Inheritance Tax (IHT) to be the most unfair tax levied on UK residents, revised HMRC forecasts were suggesting that up to 50,000 more families would be faced with an IHT tax bill by 2028.

The poll which asked voters to consider and prioritise how fair/unfair each UK tax was, put IHT at the top of the list with 43% of the 1,000 respondents saying it was unfair – ahead of Council Tax and fuel duty (both 40%).  Even though only around 5% of estates end up paying IHT currently, the freeze on the threshold at £325,000 until 2028 means more people will end up paying the tax as house prices and inflation rise. This is unlikely to win more votes in terms of the fairness of the tax.

When the freeze on the threshold, the value of an estate before IHT is payable, was announced in 2021, HMRC anticipated that around 13,000 extra estates would fall foul of the levy by 2028. Revised forecasts now predict that this number will increase to just under 50,000.

How does the IHT threshold work?

The threshold is currently set at £325,000 for an individual. After this value, IHT is payable at 40% on everything over £325,000. There are various caveats and reliefs that mean the value of a main residence may increase the threshold if the property is passed directly between spouses/civil partners and then onto their children, but it is the rate of increase in property values primarily that is likely to drive the rise in the number of people paying IHT.

Research by Canada Life suggests that if the IHT threshold were to keep pace with the property market and inflation, it would currently sit at more than £700,000 and would be over £800,000 by the time the current freeze ends in 2028.

Will IHT tax be abolished?

Whilst deemed to be the most unfair tax by voters, there seems to be little interest amongst the main political parties, in abolishing it. But as we move into general election mode in the months ahead, be prepared for further clarity on this policy. There are increasingly more voices in the Conservative party keen to axe the tax because they believe it will be headline grabbing, but whether it will grab the policy makers with the same vigour is unclear.

Interestingly, in the ‘tax fairness’ poll, respondents felt health taxes (tobacco and alcohol) were amongst the fairest levied, but this was alongside taxes paid by the wealthiest and the highest earners – ironically those typically paying IHT already!  So, there is something of a dichotomy in the results and as the rich get richer and invest in property, the long-term safe bet for investment – it will be interesting to see whether future iterations of the same poll still believe it to be unfair.

Whilst it gains a significant amount of negative press and has a perception of a death tax, IHT is not a big earner for the treasury. Estimates put tax receipts from IHT at around £7 billion for the current tax year. Whilst not to be sniffed at, in the big scheme of tax income, it is a slither on the overall HMRC tax pie chart.